A surge in imports took the trade deficit in April to its highest level in 29 months. The biggest surprise was gold imports. It cannot be explained in either of the two standard ways. The sharp decline in inflation means that people are unlikely to have bought gold as a hedge. The strength of the rupee means that the use of the yellow metal as protection against a weak currency also doesn’t make sense. Investment bank Credit Suisse says that the rise in gold imports could be because restocking after the demonetisation shock has receded.

The other important question is whether higher imports are an indication of stronger domestic demand, and hence an accelerating economy. There is no doubt that demand has bounced back nicely in recent months, but too much should not be read into the trade numbers as of now. What is really welcome is the recovery in exports over the past six months despite a strong rupee. Strong foreign demand is needed to support a recovery based too heavily on domestic consumption demand.